According to a recent report released by the Economic Opportunity Program at Demos, African-American and Hispanic households are at greater financial risk and more likely to be in credit card debt than their white counterparts. The report, Costly Credit: African Americans and Latinos in Debt, analyzed and compared credit card debt and the forces driving credit card dependence in three ethnic groups: African-Americans, Hispanics and whites. Demos is a leading, national, non-partisan public policy advocacy group.
Javier Silva, Senior Research and Policy Associate for Demos and lead author of Costly Credit said:
"Any meaningful attempt to explain the widening gap between Latino and African-American families and their white counterparts must take into account the larger social, cultural and economic forces driving credit card debt."
"There are widespread inequalities in wealth and opportunity by race, in the United States, and households of color are less likely to have home equity or savings as a safety net to handle unexpected expenses or a reduction in income."
"During the recessions of the early 1990s and 2001, households of color increasingly turned to high-interest credit cards and other forms of predatory lending in order to survive. Any income gains made during the boom of the late 1990s were all but erased by the 2001 recession."
The underlying forces driving credit card debt for African-American and Hispanic households include the effects of deregulation of the credit card industry, stagnant income growth, high unemployment levels, obstacles to home ownership, lack of health insurance, and predatory lending practices.
Credit card data for the report was taken from the Survey of Consumer Finances, a Federal Reserve survey of the assets and liabilities of American families; the years 1992 through 2001 were analyzed for Costly Credit. Other data and studies used in this report are cited in the briefing paper - part of the Demos Borrowing the Make Ends Meet series.
Some of the report's findings are:
Debt hardship remained high throughout the 1990s, regardless of racial or ethnic background, for low and middle income families. A family is considered to be in debt hardship when monthly debt payments equal 40% or more of household income, which is a key indicator of household financial health.
Increasing numbers of African-American and Hispanic families had credit cards during the 1990s, but they were more likely to carry balances on their credit cards than whites. In 2001, 84% of African-Americans and 75% of Hispanics carried credit card balances. By comparison, only 50% of whites carried balances.
Hispanic and African-American families had lower credit card balances than white families during the 1990s, but the growth of their balances passed that of white families later in the decade. Between 1998 and 2001, Latino households saw a 19% increase in credit card debt, African-Americans stood at 10%, while white households saw an 11% decrease.
Because African-Americans and Latinos experience higher unemployment rates, even during economic boom cycles, they are more likely to rely on debt to offset lower incomes.
Health coverage trends during the 1990s showed that Latinos and African-Americans are more likely to become uninsured. Nearly a third of African-Americans and Latinos had no health coverage between 1992 and 2001.
In 2001, 30.9% of African-Americans and 35.3% of Latinos had zero or negative net worth - more than double the percentage of white households, which stood at 13.1%.
Javier Silva also stated:
"Compounding the problem of increased reliance on credit cards - primarily to bridge the gap between falling incomes and rising costs - African-American and Latino communities are aggressively, and deliberately, targeted by predatory lenders."
"Between 1993 and 2001, sub prime loans - one of the most pernicious forms of predatory lending to low-income, predominantly African-American and Hispanic communities - grew from 2.4 percent to 13.4 percent. Refinance loans in these same communities rose from 6.8 percent to 27.5 percent. One in five sub prime refinance loans originated in 1999 entered foreclosure, and this trend has continued, unabated, into the new century."
Some of the report's policy recommendations included:
Addressing Industry Practices
Enact a Borrower's Security Act This would restore responsible credit practices to the lending industry by offering fair terms to borrowers and prevent the sudden changes in rates, fees and account terms that currently exist.
Combat Predatory Home Mortgage Lending Congress must pass strong anti-predatory lending legislation to protect groups from lenders and brokers selling sub prime home financing.
Addressing Economic Insecurity
Expand Health Insurance In 2005, well into the economic recovery, 45 million Americans were without health insurance. Large numbers of African-Americans and Latinos who are uninsured use high-interest credit cards to pay for medical care.
Raise the Minimum Wage The real value of the minimum wage has fallen over time. The new minimum wage should be adjusted to inflation to hold its purchasing power.
Bolster Unemployment Insurance Job loss is one of the three most common precursors to bankruptcy. Many Americans are not eligible for unemployment benefits. States must expand coverage to more low-wage and contingent workers.
"While Hispanics and African-Americans comprise an increasing percentage of he U.S. population - now nearly 25% - they share less and less of the wealth while being subject to increasingly usurious lending practices. This continued economic insecurity has serious implication for our shared future and prosperity as a country. Profound changes are needed immediately to address the problem of rising credit card debt and financial security for all U.S. families."
To view the full report in PDF format, go to http://www.demos.org